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MGM Growth Properties: An Attractive Portfolio Of Properties With Potential Growth

MGM Growth Properties has priced MGP for an IPO at $21.

The pro forma information published gives an EPS of $0.92 on revs of $600.4mln.

At the moment, gambling stocks seem to be performing rather well.

MGM Resorts (NYSE:MGM) recently decided to spin off its real estate portfolios into a REIT known as MGM Growth Properties (Pending:MGP) that will have an IPO price of $21 and begin trading on Wednesday, April 20th. The IPO is expected to raise more than a billion dollars while MGM shareholdes retain 76% of MGP and its portfolio. MGM is now pushing near the 52-week high of $24 as the economy recovers from the February lows.

MGM Chart

One of the criticisms of REIT's in general has been the high valuations that are difficult to accept as a buyer. Much of this has been attributed to systemically low interest rates which leads to investors chasing dividend stocks and REIT's. Below is the Dow Jones All REIT Index, consisting of REIT's that hold American properties. Investors can easily identify that the overall REIT market is approaching resistance levels not seen since 2007 before the market downturn. This April resistance is a common theme in many of the sectors of the market right now as the upward-holding pattern continues until the Fed tightens.

Dow Jones All REIT Index

Pro Forma Results

A key tool for investors in evaluating an IPO is the pro forma publication that MGP has released. Over 2015, MGP estimated that the REIT would have had an EPS of $0.92 on revenues of $600.4mln. At $21 a share, this implies a P/E ratio of 22.83 on the pro forma 2015 results.

However, the Dow Jones All REIT Index trades at a projected P/E of 36.64 and trailing P/E of 41.80 as of the end of March. If investors were to attach these P/E ratios to MGP, the share price would be valued at $33.71 and $38.46 respectively. This would imply an upside of 60.5% and 83.1% at each P/E.

A key quality of MGP is the outlook for growth of the portfolio, not just generating earnings. The structure of the deal includes a 2% rent increase for 5 years which would give shareholders another $60mln in revenues.

Finally, since MGM is the tenant to the properties under MGP, the revenue stream of MGM must be called into question to fairly assess the risk. The corporate rent coverage ratio, or the ratio of earnings before interest and taxes to the rent (or fixed costs) is a simple way to see if a company can pay its bills.

corporate rent coverage ration mgm

Personally, it is...